The question of why the crypto market is down now is one that affects all asset classes, from bonds and stocks to cryptocurrencies. As inflation continues to rise, interest rates are a major concern for everyone, and the latest announcement from Fed Chair Powell, signaling a plan to raise rates soon, has caused stocks to drop. In addition, Steve Ehrlich, CEO of Voyager, a crypto trading company, suggested that the collapse in the market may have been the result of a tech sector slowdown.
Inflation rising to its highest level in four decades
The US economy continues to struggle to keep up with consumer demand, even with a COVID-19 pandemic. Supply chain bottlenecks, shortages of key products, and a tight labor market all contribute to rising prices for consumers. Meanwhile, a highly contagious variant of COVID-19 is driving record COVID-19 infections. This might exacerbate already-tight economic conditions. President Biden played down the impact of the epidemic, noting that the U.S. economy is in better position than many other nations.
Consumer prices rose a record eight percent in May, according to the Consumer Price Index (CPI). This was a one-point increase from April, with food, housing, and gasoline all rising at faster rates. This increase could be a sign that the US economy is under too much pressure, and the Federal Reserve is weighing on raising interest rates. While some economists were hopeful that March was the peak of inflation, the rise in prices could be a sign of more to come.
Speculative investing in cryptocurrencies
If you’ve been looking into cryptocurrency as a potential investment, you may have noticed a significant decline in the price over the last few months. Bitcoin, for example, hit an all-time high in November, and since then its value has fallen by as much as 70 percent. Similar declines have occurred for Ether and Dogecoin, as well. Backers of Bitcoin argued that it would act as an inflation hedge, but the value has dropped far more than tech company stock prices. Speculative investing in cryptocurrencies has been considered a risky business, even though the underlying technology behind them isn’t risky. According to economist Eswar Prasad, cryptocurrencies are speculative financial assets that are vulnerable to macroeconomic forces.
Although cryptocurrency prices have declined recently, the industry isn’t over yet. Speculative investments in cryptocurrency should be limited to a portion of your overall portfolio. While the market is a potential source of investment returns, investors must remember that they can lose a significant amount of money if they don’t know what to do with them. Experts advise investors to limit the number of cryptocurrencies they hold to just a fraction of their overall portfolios.
Unpredictability of price movements
The unpredictability of cryptocurrency price movements has long plagued the space. While most investors expected a big bounce after the initial coin offering (ICO) bubble burst, bitcoin actually receded from all-time highs. While the volatility of cryptocurrency prices has been well-documented, the active traders of this field are still working on the premise that the price of a certain coin will bounce on wild predictions and news headlines.
This increased interconnectedness makes it easier to transmit shocks and destabilize financial markets. Furthermore, analysis indicates that crypto assets have moved from the fringes of the financial system into the mainstream, a development that poses significant risks to the stability of the entire financial system. The heightened co-movement of cryptocurrencies poses a global regulatory framework that will help mitigate the risks. For instance, countries aiming to increase the adoption of cryptocurrencies must establish a global regulatory framework to manage the market’s monetary and regulatory environment.
Impact of regulation
New regulations may improve the stability of the crypto market, but the risk of investing in crypto still remains high. Financial experts recommend that most investors hold no more than 5% of their portfolio in cryptocurrency. They also suggest not to invest in crypto at the expense of paying down high-interest debts or saving for emergencies. Experts explain why more regulation is beneficial for crypto investors. Several advantages may be seen. Listed below are three of them.
Increasing government regulation will help keep the crypto market from becoming an investor’s dalliance. However, governments need to act quickly to prevent illicit use. As a result, they will likely enact more laws and regulations to protect their citizens from unauthorized activities. This is an important factor for investors to consider, but it’s not the only factor. Some countries have already begun implementing regulations for the crypto market, such as the AML/CFT laws.